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Eagle Bulk Shipping, Inc. (NASDAQ:EGLE)

Q1 2013 Earnings Call

May 16, 2013 8:30 AM ET

Executives

Sophocles Zoullas – Chairman and CEO

Adir Katzav – CFO

Analysts

Michael Webber – Wells Fargo

Operator

Good day, ladies and gentlemen, and welcome to the Eagle Bulk Shipping Inc. reports First Quarter 2013 Results Conference Call. My name is Gail and I will be your operator today.

At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder the call today is being recorded for replay purposes.

Now I would like to hand the call over to your host, Mr. Sophocles Zoullas, Chairman and CEO. Please proceed, sir.

Sophocles Zoullas

Thanks and good morning. I would like to welcome everyone to Eagle Bulk Shipping’s first quarter 2013 earnings call. To supplement our remarks today I encourage participants to access a slide presentation that is available on our website at www.eagleships.com.

Please note that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance and are inherently subject to risks and uncertainties. You should not place undue reliance on these forward-looking statements. We refer all of you to our filings with the Securities and Exchange Commission for more detailed discussions of the risks and uncertainties that may have a direct on our operating results, our performance and our financial conditions.

On slide three you will note the agenda for today’s call. I will first review our first quarter 2013 results and highlights. We will then proceed with an update of our commercial operations and finally present our current views on the market. Adir will then give an overview of our financials, before we open the call to questions.

Please turn to slide five, for a review of our financial results and highlights. The dry bulk market during the first quarter can be characterized as the tale of halves. The first half of the quarter was negatively impacted by the flood of deliveries during the month of January and also by the low of cargos caused by the long Chinese New Year holiday which fell in early February this year. Post Chinese New Year Indonesian coal cargos picked up and South American grain exports started to flow providing support for both Supramaxes and Panamaxes.

On the flipside Capesizes continued to experience severe pressure caused by the decrease in ton miles trade for iron ore. Newbuilding deliveries, which are now way past their peak, totaled 21 million deadweight tons or approximately 250 vessels during the first quarter. This represents a decrease of 30% year-on-year. The Baltic Dry Index or BDI averaged 796 points for the first quarter, representing a decrease of 16% sequentially and a decrease of 8% year-on-year.

Turning to Eagle Bulk the company reported a net income of $1.4 million or $0.08 per share for the first quarter of 2013. Given our short-term chartering strategy our earnings continue to be highly correlated to the spot market. Net revenue for the quarter was $72.2 million. EBITDA for the quarter amounted to $32.5 million. Fleet utilization which is calculated as the number of operating days divided by the number of available days remained at an impressive level of close to 99.1%.

Separately I am pleased to announce that the settlement with KLC resulted in a positive impact of $33.1 million for the quarter. Adir will go into this in a little bit more detail later on in the call.

Please turn to slide seven for an update on our commercial operations. Eagle Bulk’s fleet totals 45 vessels, comprised of 43 Supramaxes and two Handymaxes and is considered one of the largest and most homogenous in the industry with an average age of just 5.9 years. We employ an opportunistic and dynamic approach to chartering, utilizing a mix of long term time charters, contracts with the freight (metro) COAs, short-term voyages and indexed charters.

Given the continued weak period market we remain short in tenure until there is a further improvement and normalization in charter rates. As of March 31, our chartering position for the remainder of 2013 was as follows: 20% of our fleet was either fixed on time charter or performing COA business, 1% was indexed to the Baltic Supramax Index or BSI and 79% was open for charter.

On slide eight we illustrate Eagle Bulk’s cargoes for the first quarter, which totaled almost 4.9 million tons. The composition was 55% in minor bulks and 45% in major bulks. We continue to move a record amount of coal which totaled 1.7 million tons during the period or almost 40% of total cargoes carried. To put this in context this represents approximately 34 voyages. We primarily carried coal from Indonesia destined for both China and India but we also moved product from both Columbia and the U.S.

Other cargoes carried during the quarter included cement, representing almost 500,000 tons, grain and agricultural products which totaled over 400,000 tons and iron ore representing close to 350,000 tons. In total we carried over 20 different cargoes during the quarter. This can be attributed to the Supramaxes’ known versatility in being able to load and discharge cargo using onboard cranes for being able to navigate in smaller ports and for its optimal size in matching cargo stems.

Please turn to slide 10 for a review of the industry fundamentals. As I mentioned earlier in the call the first quarter was very mixed. The first half of the quarter was characterized by negative factors such as the seasonal spike in deliveries which occurred during January and by Chinese New Year in February which kept significant number of cargoes out of the market as well.

Rates for Supramaxes bottomed at $6,900 a day on February 13th and then rallied by 44% by the end of the quarter. Panamaxes realized a similar performance. The upturn in Supramax and Panamax rates during the second half of the quarter was primarily driven by a pick-up in the minor bulk and coal trades and by record grain exports out of South America.

For the full quarter Supramax averaged $8,100 per day, representing an increase of 6% over the prior period, outperforming both Panamaxes and Capesizes by 15% and 34% respectively. Panamaxes averaged $7,100 per day for the quarter while Capsizes averaged $6,100 per day. Supramax outperformance can be attributed to the better relative supply demand fundamentals and to its flexibility as outlined earlier.

Please turn to slide 11 for an update of the supply fundamentals. Scrapping of older vessels remained strong. Over 9 million deadweight tons equaling a 150 ships was scrapped between January and April of this year alone. We continue to believe the depressed earnings environment would drive owners of older tonnage to sell ships for demolition, especially given strong scrap rates which are still hovering around $450 per lightweight tons.

Assuming the current pace of demolition will continue we project that almost 30 million deadweight tons or 4% of the fleet will be scrapped this year. In regards to scrap candidates there are approximately 1,500 vessels which fit our scrap candidate criteria. On the right hand side of the slide we depict the current profile of the scrap candidate fleet by asset class. The sub-Panamax segment remains by far the oldest in terms of number of vessels which totals over 1,100 equating to 16% of the fleet.

On slide 12 we take a detailed look on past deliveries and future order book. As mentioned earlier in the call newbuilding supply growth remains at high levels but deliveries are past their peak which occurred during the second quarter of last year. April deliveries totaled 5.5 million deadweight tons, down 62% from their peak level in June.

On the new order front there has been a pick-up in contracts placed in 2013 as compared to last year. Orders placed during the first four months of this year totaled 15 million deadweight tons or 150 vessels. Almost 67% of this amount relates to Capesizes, 20% to Panamaxes and 6% or just seven vessels is linked to Supramaxes and 7% to Handysizes as well.

The order book as a percentage of the fleet outstanding stands at just over 18% down 77% since peaking in ‘08. We believe the majority of new orders placed this year relate to just a handful of large contracts and does not signify a general return to the new building market. In addition it is our understanding that shipyard capacity is now more or less full through 2015 at the top yards. Given this fact we are of the opinion that the majority of buying will be in the second hand market.

Please turn to slide 13 for a review of the current market fundamentals. The second quarter has been very much a continuation of the momentum exhibited during the second half of the first quarter, which we discussed earlier. Coal cargos continue to pick up and South American grain exports continue to push the market for Supramaxes and Panamaxes even higher. Supramax rates broke through $10,000 per day rate in late March, a seven month high but have since subsided a bit into the low nines. The quarter-to-date average for Supramaxes is $9,400 per day, an increase of 16% over the prior period. Panamaxes have been averaging $8,800 per day, an increase of 24% over the prior period.

Capsizes however continue to suffer primarily from the lack of long haul Brazilian iron ore cargos. Rates are averaging just $4,800 per day, a decrease of 21%. Looking forward to 2013 we believe risks related to any serious macroeconomic shocks continue to abate. Vessel supply growth remains high but is coming off quickly. Demand remains firm but also choppy in the near term. As we’ve stated previously we do not foresee information of a real recovery taking place, but we do see something happening as early as the end of this year and into 2014.

On slide 14 we discuss long term demand fundamentals. Our thesis has not changed and we continue to view the fundamentals as strong especially for coal. Global urbanization as depicted in the chart on the left side of the slide is expected to drive increased long-term demand for both the minor and major dry bulk commodities. Steel production is projected to increase 40% by 2020 leading to increased demand for both iron ore and metallurgical coal. Over 450 gigawatts of new coal fuel power capacity is expected to come online by 2017. This equates to over 1.4 billion in incremental coal demand which will primarily be sourced from Indonesia and Australia.

To summarize, we view the short term fundamentals for the dry bulk market as remaining challenging but improving by the end of this year and into 2014. The long term fundamentals remain robust. I will now turn over the call to Adir who’ll review our financial performance.

Adir Katzav

Thank you, Soph. Please turn to slide 16. This is a summary on our first quarter results of operations. Our net revenue for the first quarter was $72.2 million, compared to $52.6 million for the first quarter of 2012. The year-on-year increase in revenue is due to the KLC settlement agreement that results in positive impact of approximately $33.1 million, which I will discuss in detail shortly.

Our operating income for the quarter was $24.8 million as compared to an operating loss of $7.5 million for the first quarter in 2012. Our cash interest expense for the quarter was $11.3 million compared to $9.8 million for the first quarter of 2012. Our non-cash interest expense for the quarter was $9.3 million, that included PIK interest of $7.2 million and deferred financing cost of $2.1 million compared to only deferred financing costs of $1.1 million for the first quarter of 2012.

EBITDA as adjusted for exceptional items as defined in our freight agreement was $32.5 million for the quarter compared to $13.8 million in the first quarter last year. Net income for the quarter was $1.4 million or $0.08 per share.

Please turn to slide 17 for a summary of our balance sheet. Cash at the end of the quarter was $19.3 million, an increase of $1.2 million quarter-on-quarter.

Please turn to slide 18 for an update on KLC. As we mentioned in our previous call, in the first quarter of 2013, we reached a comprehensive agreement for early termination of 13 chartered out vessels to KLC. In addition, on March 28, 2013 the Korean court approved an amendment to the KLC rehabilitation plan after receiving a favorable vote from the concerned parties. The amendment among other changes converts 90% of the creditor’s long term receivable to KLC new shares and reduced the value of the existing number of share by ratio of 1 to 15.

The positive impact on our financial statement from the KLC settlement includes a cash payment of $10.3 million, a release in a bank liability of $3.5 million, a deferred cash payment at a fair value of $2.7 million, a deferred revenue in fair value of charters related to KLC of $13.7 million and KLC shares valued at $2.9 million. The total quality of impact amounted to $33.1 million of which we recognized $32.8 million in revenues, $3.3 million as a gain on time charter termination and realized loss in investment of $3 million.

On May 9, 2013 we received our new shares in KLC and now we own approximately 5% of KLC outstanding shares which are subject to six months lock-up. This concludes our presentation. Now we will turn the call to the operator to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from the line of Mr. Chris Wetherbee from Citi. Please proceed

Unidentified Analyst

Hi, this is Alex (Hunt) in for Chris. We wanted to know if the demand was supportive of the spot market rates going to the back half for the year and when we can see a rate recovery.

Sophocles Zoullas

Hi, good morning. That’s a great question. I would say the whole downturn in the market going back to end of 2008 because it’s been a very protracted bad market has never really been a demand problem apart from the first six months after Lehman Brother which was a dislocation in the banking system when there was demand for cargos but people couldn’t get (those) rating issued. So demand in our view has been pretty consistent throughout 4.5 years. But it’s never been a demand problem. The problem’s really been a supply problem as I characterize in the remarks earlier which we view as subsiding pretty quickly through this year, really end of this year into next year, and by the summer of next year quite rapidly.

So our view on demand is that it’s been stable throughout. Our outlook on demand for the next year is good, as you know, because we typically see 20 to 25 different commodities because we freight Supramaxes which carry every kind of dry bulk cargo we feel we have very good visibility on dry bulk commodity demand. Our view is that across all the commodities we see there is generally healthy demand.

The only thing I will comment is that we did notice a dislocation in the iron ore trade in the first quarter which impacted the bigger ships but it’s only a small part of our trade, that’s why we were able to move into a lot of other markets and also you saw us move more into the minor bulks at 55% of our cargos carried which is reflective of a weaker market, where we move into the cargoes that the bigger ships can’t carry. I hope that answers the question.

Unidentified Analyst

Yeah definitely. Thanks. And just another question about KLC, are those issues now over or do you expect other settlements along the way?

Sophocles Zoullas

Well no one has a crystal ball, but we are feeling good about things. As you know they – and as Adir mentioned this settlement was approved by the courts in Korea. So we are feeling pretty good about things.

Unidentified Analyst

Okay, all right. That’s it. I will turn it over.

Operator

Thank you for your question. Your next question comes from the line of Michael Webber from Wells Fargo. Please proceed.

Michael Webber – Wells Fargo

Hi, good morning guys. How are you?

Sophocles Zoullas

Hey, hi, Mike good.

Michael Webber – Wells Fargo

Good, you guys, in your 10-K that you guys put along with your results which was really helpful, you kind of give some updated commentary around where you are with your covenants and what rates – where rates were and kind of where they could go and then what, how that plays with your covenants. Can you maybe try to quantify I guess as we look at – you talked to potential improvement, short term improvement in the rate environment in the back half of the year and then long term fundamentals remaining solid.

Can you maybe talk to what rate you guys need to see in order to maintain compliance with your covenants through kind of Q1, ‘14 time frame? I know it’s a tough question to answer but if you can give your best shot it would be helpful.

Sophocles Zoullas

I will take that. So good question, Mike. I think the best way for us to answer that is as you know we probably put out more detail and as you highlighted not just in the press release but also in our Ks and Qs. I mean we put out everything. It’s a very transparent company here, including charter rates on the fleet ship by ship duration. We give you the BSI. You can look at the forward curve. We have given you all of the covenants. So rather than on the call go through ship-by-ship charter rates, it’s all out there. So I would say just if you look at all of the data that I just mentioned it’s pretty easy to calculate.

Michael Webber – Wells Fargo

No, no, I am in the (pocket) right now but we – certainly it’s something we do calculate like this. I am just trying to think about from your perspective you are not expecting a rate improvement in the back end of the year. And ‘14 is certainly still a question mark. How big is that delta and then is that something where you are already having conversations with your lenders about another set of waivers. You got a fair amount of runway from an annual perspective but the waivers certainly come back into play, so just kind of an update there.

Sophocles Zoullas

No I would say we differ little bit with your view, which is we think that the waiver market’s moving. I can’t tell you the magnitude of it but I think end of this year is better than beginning of this year and we are feeling pretty good about 2014 right now. So I would say we are feeling we are generally feeling good about the market, not that it’s a great market today but the trajectory of the market as we outlined in the last call and this call is about in line with what we expect.

Michael Webber – Wells Fargo

Got you. Okay you had also mentioned in that same text in the K and the Q, some other cost saving measures and kind of longing for the just the strength to get the – to kind of bolster your liquidity and your covenant compliance. Is that already reflected in your results or is that something you were referring to in terms of ability to kind of block and tackle throughout the back half of the year and other ways you can kind of try to play for compliance.

Sophocles Zoullas

What we did is last year we put in place a cost saving program and from when we did it last year to the time you implement it, it takes a couple of months. And I think what you guys are seeing in this result is the positive results of a program that we implemented last year. And it’s meaningful and it’s been very helpful to the company in a tough market and I think is indicative of a proactive management team in a tough market.

Michael Webber – Wells Fargo

Got you. So in terms of what you are looking at for the back half of the year, is there a way to quantify what you think you can potentially save and what sort of cash impact that could have?

Sophocles Zoullas

Well I would say this quarter was a really great quarter in terms of our cost saving program. But I would say wait until you get another quarter, wait till we report 2Q, so you can get kind of a run rate a little bit, because I think that’s what you are asking, right.

Michael Webber – Wells Fargo

Effectively.

Sophocles Zoullas

Yeah, so I would say this was a great quarter for cost savings but probably wait another quarter to get a run rate.

Michael Webber – Wells Fargo

Got you. Now I guess beyond that and beyond a rate recovery, I mean in terms of just real world liquidity and maintaining that cash position, the cash position, net cash position certainly, is there anything else you see out there that you guys can do besides looking for improvement in pricing and just blocking and tackling. And the KLC shares I think the lock up ends in November, I am sure you don’t know what you want to do with those yet and if you did you won’t want to talk about it but anything else out there that you see that you could do to potentially bolster liquidity?

Sophocles Zoullas

Well, look the truth is in this market which I mean Q1 was a horrible beginning and an okay recovery towards the end as I said. Look, I think the proof is in the results. We have an effective cost saving program that we put into place in ‘12 that you are seeing the results in Q1 of ‘13. We are very happy with the result of the KLC transaction that was approved in Korea recently.

We are in the right asset class by far. I mean I remember when people were criticizing me a couple of years ago about why do we have a young Supramax fleet and why are not in Capes and I think the answer is pretty self-evident right now, having a five year old fleet, one of the largest Supramax owners, having a global set-up and presence where we are able to COAs, index and this dynamic charter strategy and stay short in tenure is where we want to be, because when the market recovers we don’t to miss it, we want to be participating in it.

Michael Webber – Wells Fargo

Got you. Okay. That’s all folks. I appreciate the time.

Sophocles Zoullas

Thanks.

Operator

Thank you for your questions. I would now like to turn the call over to Mr. Zoullas for closing remarks.

Sophocles Zoullas

I would like to thank everyone again for joining us for the first quarter 2013 earnings call, and we look forward to keeping you updated of new developments in the future.

Operator

Thank you for your participation in today’s conference call. This concludes the presentation for today. You may now disconnect and good day.

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